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Jobs: Solid, Not Spectacular

By Michael Englund and Rick MacDonald Has the U.S. jobs machine continued to power ahead after February's outsize gains? At Action Economics, we expect the

employment report for March, scheduled for release Apr. 1, will show an increase in nonfarm payrolls figure of 200,000 -- below economists' median forecast of a 225,000 rise and the hefty gain of 262,000 in February. Still, that would be a respectable increase in the so-called headline employment number.

Among the report's other highlights, the unemployment rate is expected to moderate to 5.3% (median forecast: 5.3%) from February's jump to 5.4%. The workweek is projected to hold at 33.7 hours. Hourly earnings are expected to rise 0.2% after remaining steady in February.

Initial claims for unemployment benefits fell to 318,000 during the latest reported survey week in March, following a spike in the first week to 328,000. The new claims level is well above the 303,000 survey-week reading in February, but it matched the 318,000 midmonth reading for January and is below the 331,000 reading for December and November's 335,000. The March level for initial claims has historically been consistent with payroll growth in excess of 200,000.

A SENSITIVE DOLLAR. How are financial markets likely to respond? Treasury-bond investors will focus on the employment data to divine prospects for further Federal Reserve interest rate hikes through 2005. At Action Economics, we don't expect the data to alter current expectations of a steady string of modest quarter-point Fed funds rate hikes at each of the Federal Open Market Committee's policy meetings through the summer months.

The dollar also will be highly sensitive to the employment figures, although the broader focus remains on the record current-account deficit and related capital-account needs.

Overall, the employment data should confirm that job growth remains healthy, which bodes well for the economic outlook. It would also suggest that the excessive level of Fed policy accommodation that has been in place for the last few years can continue to be removed. The data should support a tightening trajectory at the "measured" pace that has served the Fed well since the current cycle started in mid-2004. Englund is chief economist and MacDonald global director of investment research for Action Economics

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